This article is the third in a series in which Jim Carter examines the lessons project owners can learn from the ways nuclear construction projects have gone wrong in the past. He shares observations from research and years of experience in nuclear power to help deliver successful deployments of all kinds.
In the previous blog posts in this series, I talked about starting projects off right and keeping them on track. I’m devoting this post to the contract process – how to develop and manage contracts more effectively.
First, I’ll go through some of the challenges we’ve faced in past deployments. Then I’ll share my thoughts on how we can improve on those situations in future projects.
Previous challenges
Contract provisions. Apart from several lump sum turnkey contracts early in the commercial nuclear power industry, contracts for engineering, procurement, and construction (EPC) services were primarily based on reimbursement for time and materials.
With limited stake in the outcome, contractors had no commercial incentive or disincentive in the project’s success.
Vague contract language often led to disputes. Weak contracts were related to many issues, including:
- responsibilities and authority, especially for turnover and commissioning
- scope, schedule, and budget control
- change control
- reporting requirements
- problem identification and resolution
- milestone definition and achievement
- contractor management
- prerequisite planning
Some may argue that details on such matters are inappropriate for contracts. However, a lack of contract-mandated processes with defined minimum requirements and approvals often led to weak processes favoring the contractor. It also led to avoidable cost for effecting contract changes.
Contract management. Contract management was often considered an administrative function, focused on invoice review and accounts payable. Contract administrators were often mid-level, quasi-clerical personnel with limited authority and marginal responsibility for oversight of contract compliance (contrasted with the enormous oversight of technical quality control).
Often, project teams were too busy to deal with the responsibility for budget or schedule changes and were not well-versed in contract requirements. They focused on getting the physical work accomplished.
Project managers often were swamped with their duty to manage contractors and resolve problems. They had little time to focus directly on contract management, unless a significant issue arose. In fact, it was not uncommon for contract requirements to be confidential and not available to many in front line management.
The overall result was often poor, ad hoc execution and limited accountability. In addition, poor change control requirements precluded or limited documentation of the rationale for authorizing specific changes, making causation and responsibility difficult to determine.
Owner involvement. Some owners trusted and relied on contractors as the deemed experts. The prevailing position was: “Let the contractors do their jobs, don’t interfere.”
That extreme approach didn’t always work. Many owners got involved after a problem became serious.
Contractors were reluctant to involve owners in problems that might reflect negatively on their performance or reputation. Underqualified or uncooperative owner teams fueled that contractor attitude.
Weak executive involvement and support by all parties until crisis also worked to the detriment of the project.
Suggestions for new nuclear deployment
Phased contracts. Separate contracts can be established dealing with phases of a project. For instance, before a large EPC contract for the plant is awarded, a planning phase agreement can be put in place for developing estimates and schedules and preparing for execution.
Such a planning phase would inform the development of an execution phase contract. The carrot of obtaining the execution phase work would be performance incentive for the planning phase contractor.
Obviously, experience gained by the planning phase contractor would be valuable for executing the work and the performance phase contractor would likely be most suited. However, retaining the option to select a different contractor would be advisable.
Based on the planning phase, hybrid execution contracts could be developed. Such hybrids vary, but may involve three approaches:
- Fixed Price – where the scope is well defined, the parties could agree on fixed price terms whereby the contractor agrees to perform the well-defined scope for a set price.
- Time and Materials – where the contractor is reimbursed for allowed labor and expenses with provisions for overhead and profit.
- Target Price – where services are reimbursed on a time and material basis with a threshold, below which the contractor receives incentive and above which the contractor does not and may be penalized.
There are numerous variations and details associated with these hybrids, but they have gained favor in recent mega-project contracts. Experts experienced in hybrid contracts must be involved – not just attorneys, but also individuals with experience in similar contract development and performance on a nuclear project. Such experts should be involved regardless of the hybrid nature.
A well-informed contract development team can address issues based on direct experience and can ensure that technical and commercial contract language focuses on minimizing problems during contract performance. Such support is well worth the up-front cost.
Well-defined responsibilities. Contract management responsibilities should be well defined and unequivocal. The function should not be back-seated in administrative purgatory, but should be represented at the project management table.
If project managers have contract administration responsibilities, care should be taken to avoid distracting PMs from their primary tactical and strategic duties.
In the heat of battle, properly documenting changes must not be lost. Contemporaneous documentation of events is much more probative in hearings than retrospective reconstruction of facts.
Whether this responsibility falls under a contract management team, a change management team or elsewhere is subject to discussion and decision by management, with the support of experienced advisors.
Adequate owner oversight. A Congressional Review by the U.S. Nuclear Regulatory Commission[i] reported that:
“The root cause for the major quality related problems in design and construction was the failure or inability of some utility management to effectively implement a management system that ensured adequate control over all aspects of the project. These management shortcomings arose in part from inadequate nuclear design and construction experience on the part of one or more key participants in the nuclear construction project: the owner utility, architect-engineer, nuclear steam supply system manufacturer, or the constructor, and the assumption by some participants of a project role that was not commensurate with their level of experience.”
Although the NUREG document addressed technical quality, its observations translate well to the commercial aspects of new nuclear deployment. Stakeholders in new nuclear deployment would be well served by reviewing and addressing the issues addressed in that NRC report.
Jim writes more extensively about this topic in his paper, “Small modular reactor deployment: Learning from the past and the present,” which was published in The Electricity Journal. Download the paper here.
